Institutional investor Seth Holm said he’s upbeat on transportation stocks long term but noted the sector is in a “perfect negative storm,” with volumes under pressure, a collapse in pricing and roughly 50% inflation across most cost buckets. His comments were part of a fireside chat with Craig Fuller, FreightWaves founder and CEO, at Future of Supply Chain in Atlanta on Wednesday.
“I’m very, very positive … I think if you invest in anything in surface transportation, you’re going to make a lot of money over the next couple of years,” Holm said. However, he noted it’s currently a tough market for transports, which are underperforming broader indexes.
He said the majority of the names he follows are off 15% year to date compared to the S&P 500, which is up 12%. “That’s really hard to deploy capital into a market where those stocks are the only stocks in the market down every day.”
Holm is the founder and CEO of West Brow Capital, a Chattanooga, Tennessee-based long-short hedge fund investing solely in transportation companies around the world.
The space is down and for good reason.
Many transportation providers reported cycle-worst quarterly results to start the year. Some of the best asset-based truckload operators like Schneider National (NYSE: SNDR) and Werner Enterprises (NASDAQ: WERN) saw operating ratios (inverse of operating margins) reach mid- to high-90s levels after posting mid-80s results during the COVID freight boom.
Some fared even worse.
Heartland Express (NASDAQ: HTLD) reported a third straight net loss as it grapples with integrating past acquisitions in a freight recession. Even Knight-Swift (NYSE: KNX) lost money when excluding add-backs, although the company is navigating idiosyncratic acquisition and divestiture headwinds. Its TL segment reported high-70s ORs at the cycle peak.
Holm referred to transportation stocks as “deep cyclicals,” experiencing huge swings in both up and down markets. His advice to investors in the space is to “embrace that cyclicality.”
That’s where Holm says a long-short approach (buying equities on the belief that they are undervalued and the share price will go up, or betting something is overvalued and a price correction in coming) is helpful.
“It’s really hard to be a long-only transportation investor, because who wants to invest in something that’s down 15% when arguably the U.S. stock market is approaching a bubble.”
Holm’s long-term optimism comes as year-over-year comparisons ease and cost inflation slows. Further, future interest rate cuts will likely rejuvenate the housing market and spur consumer spending, leading to an expanding inventory strategy among companies.
He believes the worst case for the space is the freight cycle remains “lower for longer,” with the stocks being “dead money” for a while. But with $1.70 per-mile TL spot rates — below profitability for the vast majority of fleets — he said the next likely step for rates is up.
“You’re really betting on irrationality indefinitely if you’re short trucking.”
Holm launched the fund after leaving FreightWaves in the fourth quarter of 2021, just months ahead of the current freight recession, which he said was probably “the worst time in history” to start a transportation-only hedge fund.
“You don’t get a second chance at starting a hedge fund,” Holm said. “It’s been both fun and a challenge, and it’s exciting because finally we’re going to get an up market here.”
More FreightWaves articles by Todd Maiden
Forward Air shareholders OK conversion of Omni’s shares to voting stock
Transfix sells brokerage unit to NFI
Saia’s stock pops on May’s volume acceleration
The post Transports-only hedge fund manager hopeful despite ‘perfect negative storm’ appeared first on FreightWaves.